Blanchard gave the reasons of these two revolutionary moves to the Hepburn Committee. It was "urgently represented to the trunk lines," he said, "by some refiners at the West as well as by others at the seaboard, and also by crude shippers and receivers and by owners of pipe-lines, that it was in every way desirable that the refiners of Cleveland and Pittsburg, and those at the seaboard be put upon a basis of equalisation in the gross rates of transportation to and from the refineries." Now to do this the element of distance had to be disregarded. Cleveland was 150 miles west of the Oil Regions, but she must be treated as if she were at the same distance from the seaboard. As soon as the proposition was made, certain of the refiners and producers objected unless the railroads went further and equalised rates on coal, acids, cooperage, etc. This, however, the roads declined to do.
As for the second clause — the rebate on all oil coming from pipes which kept up a fixed pipage — it came about in this way. While the railroad men were in conference at Long Branch, Henry Harley, the president of the Pennsylvania Transportation Company, came to them and said that he believed the scheme of equalisation could not be carried out unless some kind of an alliance was made with the pipe-lines. There had been a large increase in the number of pipes in the four or five years preceding, and a situation had arisen not unlike that in every other branch of the oil business. There was perhaps twice the pipe capacity needed for gathering all the oil produced, and as the pipes were under at least a dozen different managements, each fighting for business, the result was, of course, just what it had been on the railroads and in the markets — severe cutting of prices, rebates, special secret arrangements, confusion and loss. It had been only nine years since the first pipe-line had been a success, and considering the phenomenal growth of the business and the important part the pipe played in it, it was of course a situation natural enough. Like the overgrowth of refining and of production, it was something only time and solidification of business could remedy.
Mr. Harley laid the situation before the railroad men and said to them: "We want you to help us keep up an even and equal pipage rate. Here we are representatives of the nine most important lines in the Oil Regions. We want to put a stop to cutting and keep up a rate of thirty cents. Can't you help us?" Now up to this time the railroad had had nothing to do with pipe-line charges. It was, and still is, the custom for the buyer of the oil to pay the pipage, that is, the oil producer on running the oil into the pipe-line received a credit certificate for the oil. If he held it in the line long he paid a storage charge. When he sold the oil, the line ran it, and the buyer paid the charge for running. Now the United Pipe Lines proposed to the railroads a through rate from the wells to the seaboard as low as they currently made from the receiving points on the railway, the pipes to get twenty per cent. of this through rate. The railroads were to agree not to receive oil from buyers except at as high a rate as the pipes charged; and to allow no pipe-line outside of the alliance a through rate from the wells. The memorandum said squarely that the intent and purpose of this was to make the United Pipes the sole feeders of the railroads. It was a plan not unlike the South Improvement Company in design — to put everybody but yourself out of business, and it had the merit of stating its intent and purpose with perfect candour. 40
The railroad men seem not to have objected to the purpose, only to the terms of the proposed arrangement. Mr. Blanchard told the pipe committee that he regarded it as the most violent attempt on the part of the tail to wag the dog that he had ever seen, and the representatives of the other roads agreed. They saw at once, however, how much more solid their own position would be if they could be sure that no pipe-line delivering to them would cut its rate, if there could be in effect a through rate from the wells, and after some discussion they proposed to the pipe-lines to add twenty-two cents a barrel to the rail charges; that is, if the rate to the seaboard was $1.25, to collect from the shipper $1.47, and in case he could show that he had taken his oil from one of the United Pipes to give him a rebate of twenty-two cents. Mr. Blanchard said that they proposed to do this until proof was had that the associated pipe-lines were acting in good faith. Of course this arrangement did not change the pipe-lines' methods of collecting in the least. It simply forced a uniform charge, and this charge was to be, it should be noticed, regardless of distance. The charge for collecting and delivering oil was to be thirty cents a barrel whether it was carried one or ten miles — a practice which prevails to-day.
While these negotiations were going on, the Oil Regions as a whole was troubled by a vague rumour that freight rates were to be advanced. In the two years since the Oil War the region, as a whole, had adjusted itself to the tariff schedule of March 25, 1872, and was doing very well though working on a very much smaller margin of profits than ever before. The margin was sufficient, however, to keep the refineries in the valley running most of the time, and several of the large ones were increasing their plants. Detailed accounts of the condition of the works are to be had in the newspapers of the day. Thus, in the summer of 1874 an editor of the Oil City Derrick made a tour of the creek refineries and reported all of the larger ones in Titusville and Oil City as prosperous and growing, and the small ones in the little towns between these two points as "jogging along pleasantly." The keen competition between the different refining points made it necessary to do business with economy, and a rumour of a raise of freight rates naturally was looked on with dread. It was not until September 12, however, that the new arrangements were made known, and this was some time earlier than was intended. The slip came about in this way. The general freight agent of the New York Central road, James H. Rutter, sent out on September 9 a private circular announcing the new arrangement, 41 an advance of fifty cents a barrel on refined oil shipped to the seaboard, no corresponding advance for Cleveland and Pittsburg, a rebate of the cost of getting oil to the refineries and a rebate of twenty-two cents to those who patronised certain pipe-lines. And to this new schedule was appended this consoling paragraph: "You will observe that under this system the rate is even and fair to all parties, preventing one locality taking advantage of its neighbour by reason of some alleged or real facility it may possess. Oil refiners and shippers have asked the roads from time to time to make all rates even and they would be satisfied. This scheme does it and we trust will work satisfactorily to all."
Among the refiners to whom the circular went was M. N. Allen of Titusville. Now Mr. Allen was the editor of an aggressive and lively newspaper — the Courier. He had fought rings and deals from the beginning of his career as a refiner and as an editor. He had been one of the strong opponents of the South Improvement Company and of the Refiners' Association which followed, and he saw at once the cloven foot in the Rutter circular and hastened to denounce it in a strong editorial:
If by an agreement of the New York Central, the Erie, and the Pennsylvania Railway Companies, crude oil — delivered from the Titusville pipe — should be hauled from Titusville to Chicago, and there refined, and the refined product then hauled to New York, all at two dollars a barrel, for the refined thus carried, it would be placing, by the railway companies, Chicago refiners upon the same level with the Titusville refiners who, on and after October 1, shall ship to New York refined made from crude oil taken from the Titusville pipe. The new freight arrangement does not make such provision for refiners at Chicago. But a Cleveland refiner may come to Titusville and buy oil for delivery from the Titusville, the Pennsylvania, the Church Run, or the Octave pipes, at this point, take it to Cleveland, and, after refining, carry the product to the seaboard at the same expense of freight, all told, that a refiner here, taking his crude oil directly from the above pipes, would have in placing his refined oil at the seaboard. This is stating the matter exactly, and we see no necessity for comment hereupon.
Again, 1,000 barrels of crude oil are to be carried to the seaboard for the same amount of money that will be required for carrying there 715 barrels of refined, notwithstanding that crude oil is a much more hazardous article of freight, from fire, than refined. If this is not a very large discrimination in favour of seaboard refiners, for which there is no compensation given to refiners in the Oil Region, our perceptions are utterly weak.
Now, before putting into effect this new freight arrangement, it may be well for the railway officials having the matter in charge to take into consideration a certain little article of agreement, which the people of Pennsylvania, on the 16th day of December last, entered into among themselves,
